Financial institutions are under-resourced for delivering stress tests, says PwC survey

Published at 09:41 AM on 09 February 2015

A survey of 10 European Systemically Important Financial Institutions (SIFIs) with assets worth £5.6 trillion reveals that most have less than 20 people dedicated to delivering stress tests, far less than banks facing comparable demands in the US, according to PwC’s latest report, Stress tests – keeping up with the rising bar, published today. 

Even though carrying out the 2014 stress tests was harder than expected (mostly due to data issues, insufficient resources and inadequate modelling capability), and most respondents expect the Bank of England and European Banking Authority tests to become an annual event, most plan to only add a handful of people to their teams.

Richard Barfield, financial services risk and regulation director at PwC and co-author of the report, commented:

“While the next 12 months will be challenging, regulatory stress testing does not have to be as painful as it was last year.  In many organisations, stress testing may be losing out to other priorities, which could make it difficult to meet increasing regulatory demands.  Weaknesses in stress testing capability may also increase regulatory capital requirements and therefore constrain growth and decrease returns.”

The report also reveals that regulators wanted boards and senior management to be more involved in the end-to-end testing process.  While this was a strong feature of the 2014 exercises, a lot of time was wasted through lack of clarity in management roles and responsibilities, and the need to apply judgements to overcome poor quality data and insufficient precision in model calibrations.  This leaves less time to interpret results and determine key management actions.

Respondents believe that regulators could make the process smoother and more useful by allowing more time, setting clearer expectations and communicating with greater speed and clarity.

Richard Barfield, financial services risk and regulation director at PwC and co-author of the report, continued:

“Financial institutions need to set a clear target operating model which provides a blueprint that defines priorities and assures regulators that improvements will continue.  Banks should take advantage of quick wins such as setting clearer roles and responsibilities and tackling weak points in the process, strengthening modelling of projections along with centralising the process to improve consistency and avoid duplication.

“The people leading the improvement programmes within financial institutions are also the ones likely to be needed to deliver the stress tests.  It’s important to build sufficient permanent resources into short-term and long-term plans.

“Using stress testing capabilities to support business decision making can improve the ability to set risk appetite, to assess risks  and to formulate business plans.”

Ends 

 

Notes to editor:

Download Stress Tests_keeping up with the rising bar

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